US drought prompts grain rises

International wheat prices have climbed heavily in the last month after several maize crop downgrades by the United States Department of Agriculture (USDA), as the Midwest 'corn-belt' gets baked.

The United States (US) is the world's largest maize producer and much of the American crop is under serious pressure as it battles a mid-west drought while in the crucial pollination period. Reports from note the dry spell is the worst in nearly 25 years and, while widespread, it has particularly affected key corn-growing states of Iowa and Illinois. The response of the USDA has been to cut the estimated average yield per hectare of the nation's corn crop by 12 per cent in the last month, which has driven the market higher.

While corn is king in the US, the market expectation is that high maize prices will move livestock farmers and others to look at wheat as a substitute. This has rallied wheat prices on the US benchmark Chicago Board of Trade exchange. Its May 2013 contract has gained nearly 30 per cent in value since mid June.

The USDA estimates 75 per cent of the American winter wheat crop has been harvested already, compared to just over half at this time last year, so the moisture deficit is having less effect on projected stocks of wheat.

However, if extra demand from corn cross-over is realised, there is a high likelihood the stronger wheat prices will be sustained.

The Chicago platform trades soft red winter wheat for delivery in America so is hardly in direct market competition with New Zealand wheat, but we have already seen positive effects domestically as local merchants lift their bids for 2013 wheat.

Christchurch delivery feed wheat bids have rallied from as low as $330 a tonne to figures approaching $390 more recently. The key driver of price increases within New Zealand is the boost in Australian wheat prices which competes directly with local producers, particularly for delivery to end users in the North Island.

The dry conditions that have supported prices for all grain in America have also raised the value of Australian wheat as buyers compete for supply from the two large exporters. Some reports have estimated Australian feed wheat prices have increased by as much as NZ$80 a tonne, making local grain more attractive.

While this is a huge positive for incomes next year, we have seen little movement in the price of prompt delivery wheat or barley at this stage.

Although American trading platforms have shown strong prices for near month contracts as well as for next year's, the increase does not seem to have flowed through prices being bid to New Zealand growers for prompt delivery, as the mid-winter drop in demand keeps a lid on any serious movement.